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James Hagerty Education. (2012) 'The Fateful History of Fannie Mae New Deal Birth to Mortgage Crisis Fall.'

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Freddie 33, Jim Johnson 11, Us 8, Fannie 7, Washington 7, Johnson 6, Fha 6, Danny 4, Hud 4, Cuomo 4, Freddie Mac 4, Oakley 4, America 4, Fannie Mae 4, Mrs. Harris 3, Realtors 3, Sam 3, California 3, U.s. 3, Maxwell 3,
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  CSPAN    Book TV    James Hagerty  Education.  (2012) 'The Fateful History  
   of Fannie Mae New Deal Birth to Mortgage Crisis Fall.'  

    November 25, 2012
    10:45 - 12:00pm EST  

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>> will ask a black eye, ray. last back [laughter] 's >> one, i think you are right. the question is how a lot of information to as we've all become writers have been pushed into it by communication that we are all publishers to respond a great communicator sugar tax. video because it do to them graham, that the only extra thought i had this i don't have, but a thought that contributes to the world does he talk about and that is what is the role and responsibility in delineation of the writer versus the person previous known as the reader? there is an inferred collaboration and conversation that was never the case before. you wrote it, you thought it or take it from someone else and then you wrote it and found it and ship the product at now with
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that. and maybe people talk about it. you get what they say. you don't know how many people said it. you don't know where you are wrong and you didn't have to face her critics. i get criticism all day everyday without asking because the nature of the web was that it. that's one person. everybody else loved it obviously. but there's an extra demand when you talk about the publishing industry and responsibility of a racer to promote indian conversation. maybe don't want to do that. maybe he really has said the last thing you want to say. this world doesn't allow that without a cost. i had one guy tweaked at me and he said i treated you and you didn't write me back. i'm not going to finish her book. first of all he darty bought it, so i got you.
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first of all, you are denying yourself because i didn't validate you and that doesn't scale. every author is not built to interact on that scale. no human can interact in the scale demanded that those who want a relationship with the creators and producers. so we have to find a new balance of collaboration, listening versus talking, criticizing and accepted that are say maybe i'm wrong. i don't care and letting that be okay, too. as a whole new world of the community around writing versus reading. >> that the time we have. thank you so much. [applause] be untrue
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>> now, james hagerty talks about the 1938 creation and 70 year history of the mortgage giant, fannie mae. it is about an hour and 15. [inaudible conversations] >> thank you all very much for being here and good afternoon. welcome to our book four foreign on "the fateful history of fannie mae" commits evil not only for fannie mae. their copies for sale in the reception area. which we hope you will buy and which james hagerty will be glad to autograph after the program. i am very pleased to have you here to consider with us this fateful history. in this role in american politicized housing finance. after many years of dealing with it thinking about fannie mae, i thought i knew a lot about the subject, but i learned a lot
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more from reading bob spoke, especially about the very long-term evolution of politicized mortgage finance in this country and also that the personalities involved over the last 40 years, all the way to the end of the story. at least it's the i'm so far. the book is full of information, but in addition if you read my invitation to the event of you know that i think it represents an underlying tragic drama, in fact a shakespearean tragedy in five acts. brise, power, hubris, fall and utter humiliation. [laughter] on power, many people in washington not so long ago and in the mortgage business everywhere in the country were
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truly afraid for fannie mae and the restoration of weeded out to people who dare to cross it. i hubris we had seen it often claiming it was the center of the best housing finance system in the world, unquote. every so ironically in retrospect of course. this sentiment being echoed by former senator and banking committee chairman dodd, exclaiming cne was one of the great success stories of all time, unquote. and so it was until the humiliation. all five acts are very well chronicled by bob spoke, but which shakespearean tragedy is this in the background behind the history of fannie mae?
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thinking of the fear of cne, perhaps it is richard the third, with danny is the ruthless richard brecht and finally on the field of buzzwords by henry paulson plan henry the seventh. or thinking of then fannie ceo is presented in the book, pathetically presenting financial plans to a treasury department, which had already decided to bond and was indeed scheduling his feet. is it the great pathos full and the scene from richard the second, handing over the crown to henry the fourth save by james lockhart. maybe. but i think the best shakespearean autoload is julius
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caesar with the dictator or mortgage finance cut down in the capital, henry paulson this time playing vertis. but i'm thinking especially of the great seeing for mark antonystands over and addresses the murder audience sees her. this time we have mark antony played by bob hagerty. standing over in addressing the following cne, decile by so low. well, that is enough indulging myself with your indulgence. we are about to hear from the author of this excellent book. after bob's presentation will have comments or 10 minute each from our discussion, whom i will introduce at that point. that will follow that with discussion, including your questions. at 6:00 we were lectured for reception and bob will be available for a book signing and
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formal discussion at that point. as you know, bob hagerty writes for "the wall street journal." she is now based in pittsburgh and has written as an editor in chief for "the wall street journal" and the international herald tribune in hong kong, london, brussels, paris, atlanta and new york. he served as managing editor of "the wall street journal" and london bureau chief for the journal. he was a member of the team that won the distinguished business reporting award for articles about the subprime mortgage crisis and was also one of the reporters awarded the 2008 excellence in urban journalism award. he covered feet and traded for "the wall street journal" for the eventful years of 2004 to 2010 and now he has written a very insightful and instructive book on the fateful history of fannie mae, which he will not discuss. rob, we are delighted to have
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you here. [applause] >> thank you so much, alex and thank you all for your interest in this topic. i think it's appropriate i present my bookie or because aei was so far in front of the pack in warning of the dangers of fannie and freddie. not that congress is really listening. and it is a pleasure to be here and see so many people who kindly helped me over the years i research. alex, todd, ed, tom stanton, others can't thank you all. i recently looked at the electronic urchin of my book on itunes and itunes informed me that people who bought my book also bought winnie the pooh. [laughter] well, when he first appeared in 1826. fannie mae came on a dozen years
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later and post it proved excitingly surprisingly durable. one turn into disney franchise. the other became a national disaster. despite all of the troubles, fannie and freddie stiller responsible for most new home mortgages in the night dates. so we have nationalized the huge part of our mortgage industry. how did we get to this point? what was it on purpose. as more of an accident and it was a bipartisan accident. let's go back to the 1930s. about a quarter of the workforce was unemployed. about half of all mortgage debt was in default. housing starts were down about 90%. so when roosevelt became president in 1983, the top priority was to get people back to work. sounds kind of familiar.
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building houses would be a great way to do that, but to build houses, you need bank loans and banks are not in the mood to campbell in real estate. so the government would try to make things feel more secure. the housing act of 1934 created the federal housing and industry should, the fha. it provides insurance to bank so that they know they will get their money back. but even with the fha, big still might feel nervous. they might want somebody to buy those mortgages from them. so in the same housing act of 1934, congress made provisions for you. the privately held firm scott national mortgage association. they were to buy fha insured loans. it was just one problem. no private investors wanted to do it. so finally for your site or at
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the roosevelt federal national mortgage association which became known as fannie mae. there's a tiny federal agency. what private companies would not do uncle sam would. this is not considered big news at the time. "the wall street journal" buried this story on page two and was only eight sentences long. i want to point out that was before i started at the journal last night otherwise we would have a big story in the would have been on page one. of course, washington create government programs in the 1930s and many are still with us. for when dwight eisenhower became president in 1953, he wanted to end some of those programs. this is roosevelt signing the act of 1934. when eisenhower wasn't too busy playing golf, he tried to do
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just that. he wanted to get the federal government out of the mortgage find business. he proposed legislation to gradually transforms any day from an agency to a privately owned company. the idea was to users of any may gradually with high shares in the company in the treasury would sell its shares. congress passed the legislation. eisenhower signed it. you can see they thought it was idea. but there is one fatal flaw in the legislation. there is no deadline to transform itself into a private company. so it didn't happen. in fact, four years later in the the midst a housing slump, congress ordered fannie mae to take on more government act that to finance my housing and it was the beginning of a pattern. whenever we have a housing crisis and the fannie mae was going to be part of the
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solution. innocent, and he was a to housing. the owner subject of the realtors loved it. the rest of us were really paying attention. of course any government subsidy will create a constituency devoted to preserving that subsidy. but fannie had a better organized group of allies than most other programs. the realtors and homebuilders are in every community across the country. we also do patchwork of state and local agencies and nonprofits devoted to affordable housing. collectively people are known as the hazards. at the mall together and they are almost an unbeatable coalition. so fannie mae persisted. in the 1960s the federal government have bigger problems to deal with. the war on poverty, the war in vietnam, riots, protests. these are realtors defending
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their subsidy. [laughter] reforming fannie mae just is not a huge priority in the topic came up only because of a budget dispute. critics complain the federal budget did not reflect all of the obligations of the federal government. so-called vj appointed a commission to try to settle this debate and in 1967, the commission decided the deaths of agencies such as fannie mae should be included in the federal budget. ..
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>> no one seems to opera much about whether there was a contradiction here between having a public policy role, but being owned by private shareholders wanting maximum profits. officially, the government would not guarantee the deaths. in fact, they guarantee would deny it had any responsibility for fannie mae's adapts. but fannie mae would still be borrowing lots of money and the bond market on wall street and the buyers of those bonds would assume that when he came right down to in a crisis, uncle sam would have to make good on those debts. this became known as the implied guarantee. congress never enacted it, but there it was. it made fannie mae could borrow
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money very cheaply. which meant fannie mae could be very profitable and push aside competitors who did not have an implied guarantee. joe was one of the advisors to lbj come and asked him about the idea behind this whole set. he basically said it seem like a good idea at the time. as he put, fannie mae was like a hive that attracted a private nine-piece. it brought money to housing that otherwise would've gone somewhere else. and it didn't have to be on the budget. and that was seen as a very good thing. in came the nixon administrati administration. shirley republicans would support the idea of getting the government out of the mortgage business. well, not so fast. the nixon people didn't want to let go. they noticed the president of fannie mae was ready, a democrat. he had been a big contributor to edmund brown. helping brown defeat nixon to
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become governor of california in 1962. nixon still remember that. [laughter] so one of the early dirty tricks of the nixon white house was finding a way to get rid of ray. nixon's housing sector was a fellow named george romney whose son mitt romney has been in the news lately. his dad complained that ray was not being very cooperative. he seem to think he could run fannie mae any way he saw fit. there was also talk that ray might use fannie mae postage or letterhead to raise money for democratic candidates. the white house was getting complaints from republican lawyers in south carolina that democratic lawyers were getting all fannie mae work related foreclosures, all those fees. well, within nine months of taking office, nixon fired ray lapin as president of fannie mae
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without giving any public explanation. ray lapin resisted. he fulminated to the press nixon western fannie mae into what he called a patronage putting. try to try to get a restraining order from a federal judge. the judge wouldn't budge. but ray kept showing up for work anyway. [laughter] at one point the lights went out at fannie mae's offices, and the phone lines went dead. some people interpreted this as a subtle message from the nixon white house. [laughter] finally, lapin gave up and walked away. nixon appointed a new president of fannie mae, oakley hundred. oakley was one of nixon's cronies from california from a former fbi agent, served in congress and early 1950s. then after hi's adventures in te fbi in washington he settled down with his kids as a real estate lawyer in fresno, california. it was really pretty dull.
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he was really itching to get back to washington, back to the action. so just after nixon was elected, hunter sent a chatty letter to rosemary woods of nixon's secretary i guess you'd him a special field as housing and urban development. there are very few republicans in the field and even fewer who are or what to do be with in a lifeboat. out what i like is the indian. stay healthy. you are photographing well. [laughter] hunter was always a ladies and he loved to party. i can show you exclusively this is a party favor from a fannie mae party in that era. hunter bought new headquarters for fannie mae. some people said it was the sort of panelists that louis xiv would have built, if he had the money. now, during nixon's first year in office the fed was fighting
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inflation. interest rates went up, and housings starts came down 40%. nixon in january 1970 clarity there was a crisis situation in housing. part of the solution was more fannie mae. we got the emergency home finance act of 1970. it create a second government chartered mortgage company, freddie mac, designed to cater more to the s&l industry. and more important that allow both fannie and freddie to buy a much wider variety of mortgages, not just those fha loans, not just this tiny sliver of the market, but conventional mortgages, mainstream mortgages for the middle class, even the upper-middle-class. so now than he had a much larger role in the housing market, and was running across the country like manifest destiny. why did this happen? there was no debate really in public.
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but the american bankers assocation was for it. senator john sparkman of alabama was for it. so was represented right patman of texas. george romney endorsed the idea. the rest of us were not really paying attention. along came the carter administration. carter's housing net was patricia roberts harris, and she thought that fannie was doing too much for the suburbs and not nearly enough for the inner-city. oakley hunter polite reminder that fannie mae was no longer a government agency. it was supposed to be managing its own affairs. mrs. harris threatened legislation to try to restore more government control over fannie mae. hunter always a ladies man tried sending flowers to mrs. harris, and even a box of fannie mae chocolates. she sent them back. she said if she ate those chocolates should become as fat as the prophets at fannie mae.
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well, finally the two sides came to a compromised. the department of housing and urban development, had, would set goals for amy's financing of mortgages for poor people. if that part of the business ever fell below a certain level. oakley hunter's people figured they had snookered mrs. harris because they were promising to do only what they would have done anyway. but a president have been set. the government could impose quotas on fannie mae. now it was ronald reagan's turn. it was morning in america. peter wallison was a young whippersnapper in the treasury. surely president reagan would finish the job of getting the government completely out of the mortgage business. there was even the perfect pretext. fannie mae was losing money at the time, about $1 million a day, because of a double-digit interest rates imposed by the fed to fight inflation. so the white house might have
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used that crisis as a pretext to put fannie mae to sleep. but it wasn't seen as the right time. the economy was wobbly. nobody wanted to upset the housing market. so instead of putting fannie to sleep, the reagan administration, and congress, gave it a tax break and helped it survive. by the mid 1980s fannie mae was making boatloads of money i can, and it was so profitable it was almost embarrassing. by now the ceo was a very savvy fellow named david maxwell from philadelphia. maxwell knew that there was a fundamental choice to be made. the right wing would always push to abolish fannie mae. because it was a form of socialism. the left wing would always be pressuring fannie and freddie to earn their keep by doing more for the poor. and the bigger fannie and freddie got, the more political pressure they would feel. so this government the charter,
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this role in public policy, were they really worth the bother, or should fannie mae cut the cord to the federal government and the, a truly private company? metal ordered of the study of that question, and the person you are to do this study was jim johnson. johnson came from a small town of benson minnesota. i went there. didn't find much. [laughter] from these humble beginnings johnson became a big operator in the democratic party. he worked for the residents campaigns of gene mccarthy, ed muskie, george mcgovern, walter mondale. in fact, almost everybody he ever backed for the presidency ended up losing. and they didn't even come close. but that didn't matter because he was a smart fella with great contacts in washington. so johnson did the study about whether to give up the charter. and the answer came back as in no way.
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for the shareholders, the government backing was just too valuable. it may fannie mae could borrow money very cheaply and make huge profits, and pay huge salaries to the happy few. all the while supporting the ideal of a nice house in a white picket fence for everybody. so fannie basically made a deal with the devil. it was going to keep its privileges, and is going to do whatever it have to do to defend those privileges in congress. and as fannie became more political, who would be better at running it in jim johnson? maxwell named johnson as the new ceo and in 1991, maxwell retired. anti-tacoma retirement package that equaled more than $20 million. well, even charles schumer who was normally a big fan of fannie mae was taken aback. schumer comment i think maxwell did a good job at that's enough senate.
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under johnson, fannie perfected its lobbying. it went around the country financing housing projects in the district of any congressman who might prove useful. the congressman loved posing for pictures in front of those projects and taking credit for bringing money into their districts. at fannie mae was going to need a lot of friends. because there was a political problem to be dealt with. in the late 1980s, thousands of savings and loan institutions had gone bust. largely because they made a lot of crazy loans on real estate. the deposits of those s&l's were insured by uncle sam, so the government ended up with the bill for about $124 billion, and congress felt obliged to look around and see what else might go wrong. at this point they were still regulating fannie and freddie. hud admitted they didn't have the time or expertise to keep track of them. so congress decided it was going
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to create a new improved regulator for fannie and freddie. jim johnson said that's fine, just do it our way. he said the regulator should not be allowed to micromanaged fannie and freddie because that might prevent them from doing their job which was to keep the housing market healthy, and to make more and more americans into homeowners. in 1992, congress of elite created a very weak regular for fannie and freddie. one of the very few dissenters was representative jim leach of iowa who noted that the 1992 legislation was largely written by lawyers for fannie mae. after this great victory fannie mae had a huge growth spurt under jim johnson. you can see that for the first, in the '70s and '80s and was still a pretty small agency, but then as we got into the '90s, it started to go very, very fasb
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part of that was the disappearance of s&ls who in any way for competitors. now one of johnson's main allies and golfing buddies was angelo mozilo, the man with the permanent 10. a son of the butcher from the broad street also love to talk about homeownership, which he found both in ogling and enriching. fannie with help of lenders like countrywide begin offering more loans with low down payments, 5% or less, and generally loosened restrictions so more people could buy homes. and to most people do seem like a good idea. one way to get people out of poverty it was thought was to help them own their own home so they could build up some equity. and that all seem to work out pretty well under jim johnson. he was able to retire in 1998 as a hero. and he got a pretty nice retirement deal, which was not fully disclosed at the time. his pension was about $852,000
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per year, but that wasn't all. he also remained a consultant to fannie mae and cases a successor should ever need to tap into his wisdom. they give them another $390,000 per year. plus two support staff members, plus a car, plus partial payment for a driver. the next ceo was franklin delano rainers, named in honor of the president who created fannie mae. e-zine to an example by the american thing. he grew up very poor in seattle, and prove to be a very good student he went to harvard. he went to oxford. he became an intern in the nixon white house, both the republicans and the democrats wanted him. in the end he chose the democrats. he became a lawyer. he became an investment banker. and then he became u.s. budget director under president clinton.
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for a while people were talking at him as a possible treasury secretary. at fannie mae, rainers carried on by the fast growth policies of jim johnson. the clinton administration egg him on. in july 1999, hud secretary cuomo announced fannie and freddie would increase the percentage of their mortgage financing that went to low or moderate income families to 50% in 2001, from 42% that was set back in 1995. cuomo said these new rules would provide affordable housing for 28.1 million families over the next decade. think about it. cuomo could promise degree 28.1 million homeowners without asking congress to spend a single penny. he simply told fannie and freddie to go out and do it. and they said we would be delighted. you remember how jesus fed the 5000.
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well, cuomo house that 28.1 million. rainers also ambitious goals for profits. he set a goal of doubling earnings to $6.46 per share within five years. is $6.46 number was taken very seriously by his team. this is a pet doctrine senior vice president at fannie mae. by now everyone of you must have $6.46 branded in your brains because be able to save innocent, he must be able to recite it forwards and backwards. you must have a raging fire in your belly that burns away all doubts. you must live, breathe and dream $6.46. fanny did need that earnings goal. the securities and exchange commission found fannie mae had been low off on its accounting. rainers said he knew nothing of any accounting shenanigans. this is rainers and his cfo
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explaining the dubious accounting in congress. so was he to blame? well, just last month the u.s. district judge dismissed the shareholders lawsuit against rainers. the judge found no direct evidence that rainers new accounting rules were being violated. when rainers was fired at the end of 2004 there were huge of people at fannie mae. a couple thousand consultants were hired to straighten out the books. the total cost, including fines, was more than $2 billion, but there was a bigger cost, much bigger. the executives and the regulators spent so much time worrying about accounting but they didn't have enough time to worry about what was happening in the housing market. housing prices were soaring to crazy levels, even for houses like this. everyone was refinancing mortgages, lending standards became incredibly lax, and just about everybody thought they
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could make a killing on real estate. even the playmate of the month from may 2005, jayme westin eyes are, who informed readers in playboy that she was giving up modeling to go into what she called investment type real estate. as one financial magazine later commented, she was moving from one set of inflated assets to another. [laughter] amid this very dangerous period, and he had appointed a new ceo, dan mudd, son of roger mudd, the tv newscaster. he was an ex-marine, decorated for a dangerous mission in lebanon, now he was to be into another minefield. he saw his job as clean up the accounting mess, making nice with the critics of fannie mae, meeting the hud goals which have been increased even further under president bush, and competing with walter in the mortgage market because by now,
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wall street was also crazy about mortgage, especially the rescue guys because they were very profitable. wall street was taking away more and more of the business from fannie and freddie. mudd and his colleagues are worried that fannie might become irrelevant. so what should they do? should they go out and buy the same kind of crazy mortgages that wall street was buying? or should they step back from the market and wait for a new outbreak of sanity? mudd and his colleagues knew that the risks were growing in the housing market, but they underestimated how much worse things could get and they were red-blooded american businessmen. they were out to wendie king and take on the stock options. they debated for a while in 2005, and in the end by early 2006 they decided it wall street that it was a good idea to buy lots of high-risk subprime mortgages, if wall street was raking in the dough on those mortgages, well, and he should do so, too. of course they said we will do it in a responsible prudent way.
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fannie may this indecision. they both increase their buying of mortgages at the worst possible moment. just when housing market was starting to collapse. well, by late 2007, early 2008 they were losing large amounts of money. the chinese have bought lots of fannie and freddie bonds were getting antsy. they get calling up treasury secretary paulson and saying, what's up? are you behind a fannie and freddie or not? we can hardly tell china to go jump into the south china sea because they were our biggest creditors. so by two thus made the game was over. the treasury had come in and provide huge infusions of money. so far this has cost us about $142 billion. fannie and freddie now under the thumb of the regular, edward demarco, a no-nonsense fellow. and he has promised to shrink them gradually and to reduce the dependence of the housing market on them gradually. but meanwhile, we are still
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relying on fannie and freddie to provide funding for most home mortgages. fannie, freddie and h. -- fha have account for around 90% of the u.s. homeland. eventually doctors will have to make a fundamental decision about what kind of mortgage market will we have, shall we go back to trusting a free market? or she would have some kind of government mechanism in place to ensure that home mortgages can always be affordable? i said that the historical record of the past 70 years suggests that when it comes to housing, congress will have a hard time trusting the market. thank you. [applause] >> and great comments. this brings us to our discussions, first of them will be tom who is been in a mortgage research business for a mere 35 years, a long-standing critic of government sponsored enterprises
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and has great perspective on the history which bob s. so well chronicled. no, was previously with mortgage guaranteed insurance corporation, north american mortgage, asset-backed capital research, and wholesale access, a consultancy firm. tom issued early work with the increasing risk of fannie mae, about which he was correct, and, of course, was ignored. our second discussing, is a former executive vice president and chief credit officer of fannie mae so he has lived an important part of this history. as an aei fellow he is continued groundbreaking research of the contributions of government housing policy to the mortgage crisis. into this key research papers were submitted to the financial crisis inquiry commission. he's now developing policy considerations and options including countercyclical mortgage policies and improved understanding of real estate
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value through appraisals as steps for rebuilding america's housing finance sector. tom, your first and we're looking forward to your comments. >> good eating. it's a pleasure to be with all the. my thanks to alex and tragedy and the aei for sponsoring this forum. it's a pleasure to see bob again after a couple of years. i have, as alex suggest, i've been a long-standing critic of fannie and freddie. however, i do come from the right side of the political spectrum. rather, i tend to be a lefty. i wasn't sure if i would get through the door without an alarm going off, but managed to get up here. my very first job out of graduate school was working for mgic. one of my responsibilities there was to monitor the activities of fannie and freddie. on a quarterly basis i made a pilgrimage to d.c. to visit the executives at fannie and freddie. my responsibility was to monitor
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their programs, their products, their people. and i did that for 11 years. i wrote a newsletter on a weekly basis. i include a portion of fannie and freddie because they were such a key determined of the activity that was going on in the mortgage market. so gave me an opportunity having started this in the late '70s, to really watch the history and to follow the evolution of fannie and freddie. and i didn't really become concerned about any of this until after 1992. and and i did was really threefold. as i had noticed a dramatic cultural change at fannie mae, after 1992, the attitudes, the access to people really changed fairly dramatically, and it really raised my eyebrows and those of a lot of other people.
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and after i left mgic i continued to monitor their programs as part of my consultancy at the research that i was doing. and i continue to follow all the progress. and i got progressively more concerned. it was not only the more conservative elements, but also there were liberals as well that were concerned about what was going on. and i remembered disdainfully, for example, coming to washington in the summer of 1998 to attend a seminar that ralph nader was sponsoring here he, too, was very much a critic, and so the criticism that was being leveled at fannie mae was really coming from i think all sides, although admittedly the conservatives were more on top of it than the democrats and the liberals. the concern in addition to the
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cultural change that i saw was a result of changes that were going on inside of fannie mae. and freddie mac to a lesser extent. bob has done a marvelous job of tracing this history and the evolution in the book. and for me it was something like a trip down memory lane, to read his book. because i kept running into names of people like ray lapin, roger brooke, all of the people who were involved in the agency and running it. one summer i read the guinness book, james buchanan, the nobel laureate, economic scientist, and got turned on to the concept of public choice theory. that was another alarm bell for me because it gave me another perspective in which to look at what is going on inside of
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washington. i thought very much about all of this would get salt because the problems were so immense that it seemed to me that if i would notice and i didn't come out of harvard or oxford, certainly the rest of the rest of the people of the industry would be more concerned than i was about this. i knew enough about economics to understand the difference in structure, in this duty -- industry structures, compared to duopolies and monopolies, and i knew, too, that we have market structures that were, in this case, a statutory duopoly, that it created a very large debt weight loss. so in the spring of 1996, i was invited by the mba, and i apologize if my voice oscillates on you, my ears, i got out of an
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airplane an hour and half ago and my ears have not yet popped. but in any case, i was invited to make a presentation as to the profitability of the mortgage banking industry and why it had were so many consecutive years, three prior years, why the industry had fared so poorly from a profit perspective. that prompted me to do some research, and i was very fortunate in that the summer of 1996, prior to this presentation i had an opportunity to read the gao study that came out that spring, as was the hud study and the treasury ports. and the more i read the more alarmed i became. so by the time october rolled around i was forward prepared in order to blast the gses, if you will. the speech of which most of it is there, they're still acute tables missing, it's been passed out to you, and you can see where my criticisms were.
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that speech was not particularly well received, except among people, a lot of people in the industry who felt that absolutely, i mean, many of them thought i was right on in terms of my analysis. the fannie and freddie people, however, within the first 10 minutes were up and out of their seats and out the door, and went to warn lasko who was the mba president at the time and complaint as to why they would allow someone like me to criticize them, what could i possibly know that would prove to be correct? for several years i was blackballed as a result of that, and the mba took them more like five or six years before the allowed me to come back and make a presentation. in the interim, within weeks of the research that i had been doing and selling to the industry, i got cut off by both
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danny and freddie mac. big surprise. my partners were not particularly happy about that, but, you know, in retrospect it all worked out. as time passed i became more and more concerned about what was going on, and it led me to write a series of letters to everyone, or anyone, that i thought would listen to could take a second look at what was going on. one of those letters is included among the handout materials, and that was a letter that was sent in 2000, to alan greenspan. and the particular timing on that letter was such that it was the first time that greenspan had publicly criticized fannie and freddie. and so i wrote a letter to him commending him on that, and outlining my concerns, most of which were economically-based. and asking if you would at least take a look, a closer look at what was going on.
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i continued to write letters like that over a period of years. in fact, all the way up to september of 2008. one of those letters, a second one that was included was a letter that i wrote to the hud secretary and 2005, the summer of 2005. our research firm had just completed a study of the nonprime market, and the conclusion of the study was that almost 50% of the loans that were being originated were nonprime loans. these are loans that were low documentation with high ltv's, with no income or asset verification. and it was predicated on that, that i wrote to the hud secretary and asked him if he would please discontinue championing, actually cheer
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leading homeownership. because at that we are very close to the edge. we were within a year or so i thought, as indicated in the letter, of a collapse in the mortgage market. >> you are within one minute of your time spent okay. having said that though, let me get back to the book. i write a monthly book review. i am looking forward to doing a book review having now read opposite very well written, easy to read, concise history. and, in fact, i will be published in the december issue of mortgage banking magazine. with that, let me turn it over to ed. >> thank you very much. >> thank you, alex. thank you for arranging this book session, and thank you, bob, for an excellent book but i really enjoyed reading it and like alex, i learned a lot. of the history going all the way back to the beginning to i knew
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some of it but learned lots more. thank you, tom, for all of your help and standing up to fannie and freddie and for your friendship. might ask when i read a book that i have some relative intimate knowledge is to look at that part that i have that knowledge and see how it compares to what i know. and there's a book that was called good to great, written by jim collins who has done about -- found about 10 copies, one of which is enemy. is talk about fannie mae in the 1980s, david maxwell era, and i was at fannie mae from 84-89. not taking anything away from what david did during that time period, but if you were to take up any references to famously did know it was about fannie mae and asked me what company is that chapter about, the last company in the world that it would have ever guessed was fannie mae. it just had no relationship to reality. there's another book, all the devils are here, the first
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chapter is largely about again the 1980s. and i found 20 or 25 mistakes, largely small and the first 25 or 30 pages. as i had to wonder well, what's going on in the rest of the book that i don't have as much intimate knowledge about. i can say that in reading bob's book i found no major mistakes. i might've found a baby or their work would have quibbled about a year and that's it. where he had information that i was unaware of and all seem consistent, tied up with other information i had. so again congratulations on the research work. i found that his research had a broad range of people that he talked to. that was one of the problems with all the devils are here. you look at the footnotes. at a very narrow range of people. they got a one-sided view. so you're reporting instincts and the integrity and quality of reporting really comes through to me as i read the book.
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bob talked about jim johnson and a study that was done. so the conclusion was if, don't give up the charter we have to of the charter. where to protect the charter at all costs. jim johnson was the one really came up with a strategy that said the way to do that is affordable housing. because they only regulator, the real regular of fannie mae was congress. they were the only ones who could change the charter. and if you could basically co-op congress and captured them through affordable housing, then you would protect your charter and then you could do all the things from earnings perspectives that they went on to do. y. johnson? a friend of mine had been at fannie and one of the regional office for longtime city was very simple. and had a near-death experience, interest rate risk and the
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thought that solid through hedging. they have a near-death experience in credit risk, and ed commute changing underwriting in 1995 and they thought they fixed it. they were left with one risk, political. who do you bring in to do with political risk march you bring in a politician. and that, you described well, the qualifications that jim johnson had. i want to spend the rest of the time that i have focusing on a couple of threads. one was the press release that fannie mae, jim johnson announced in 1994, the trillion dollar commitment. a couple thousand words when he went into great detail about what they're going to do. and then the national homeownership strategy, both which are discussed in bob's book. i start with lenders, this is a statement by a community activist testimony before the senate. i think would represents the point at which the challenge was
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thrown down that brought fannie mae together with community activist and congress to a college what became trillions and shows a dog dollars in affordable housing lending and a listing of the underwriting standards. lenders will respond to the most conservative standards, and less fannie mae and freddie mac are aggressive and convincing in their efforts to expand historically and narrow underwriting but i will first focus on fannie and freddie aggressively expanding the underwriting, and then circle back to lenders but i would point out that this is lenders were conservative. and that had to be changed in the way to do it was through fannie and freddie. step one, 1994, you have a handout. i'm just going to go through a bit of this quickly. and he vowed to transform, their words, housing finance. 2000 would press release that commits to transform the housing finance system, allows the company will provide $1 trillion in targeted lending. goes through, this is before the 28 million commitment that is
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now 10 million back in 1994. my in other words, new immigrants, residents in central city, other underserved areas and people are specializing needs. reach out to every renter in america. break down barriers, arbitrary barriers, every unmet wants to get a mortgage, will have their loans approved a put on a path to get the loan approved. new immigrants, that was one of the drivers for the low doc no-doc years later. eliminate the final note and mortgage application process. much was made of wamu having a slogan like that. fannie had in the press release in 1994. they promise clear and flexible underlying standard. flexible and to what extent or another word for loose lending. that's what they mean. affordable housing is another word for -- that's what it means that fannie and freddie were
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famous for the cross subsidies, well documented by oco and now fhfa. the one that really was probably the worst that really politicize danny as bob talked about, opened 25 fannie mae partnership offices eventually grew to 50 something. that will form long-term partnerships cities rural areas and underserved committee. really read political offices. that was a huge cultural change. it did not exist before the. i can testify to that. during the time which i was there. no standing the rhetoric and the noble sounding goal, this trillion dollar down payment on transform housing finance by showing america a new way home, the book that jim johnson wrote was really an effort to do a much more straightforward and monday objected, to accomplish and much more straightforward
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objective. stopping unwanted and unwelcome changes to the charter by capturing the regular, congress, and give copious amounts of affordable housing that would accomplish that. it all worked until the charter was changed on june 30, 2008, a mere weeks before the collapse. at the same time step to with a national homeownership strategy which brought in the rest of the lenders who were conservative. it literally brought everybody in the whole mortgage finance field into the fold. and created a partnership to accomplish financing more affordable and flexible in order to increase homeownership opportunities. what happened, and you have the chart, fannie bonita competition with fha, down payments with a. i only would take issue with a look at of what bob said. [inaudible] >> excuse me. this was a process that was little. it again speed but it went on for many years starting in early 1990s, about 93, 94.
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this chart in early. it's actually showing the decline and down payments on subprime a subprime have to try to compete with what fannie, freddie and at that you were doing to it had reduced its down payment. historically subprime at 25% down payments on purchase loans. this chart starts in 2001. tom had did he provided to me that showed in 1992 was about a 25% down payment. [inaudible] >> one minute. >> you have debt ratios kept going up and up and up. i would point out that this was again a process in place every day. by 2007, over one-third of the gses fully documented loans, exceeded 45 total debt ration which in time provided data that said that was a be loan, a be subprime loan back in 19 everyone. that's how prime changed over time due to these efforts. all day sort. it happen relatively early in
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fannie mae and freddie marker large players in. the consequences of the misrepresentation on lending, well-known, liar loans. same thing happened with credit scores. so back to the quote, lenders will respond to the most conservative standards, and less than and freddie are convincing and efforts to expand mayor under and. and that's what we ended up with. thank you. >> thank you very much. we're going to leave a little after time because i know many of you will want to ask questions, but let me give bob a chance. d. have any comments added this point for a minute or two? >> thank you very much that i think we should just turn over the time to people who came here today. >> will be glad to take your questions. i will remind you of aei rules. wait for the mic phone, and when you get it, you can give it to
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the young fellow here -- >> the first rule is, first get the first question. >> only if he behaves himself. tell us your name and your affiliation, and then your question, please. >> longtime fan of fannie and freddie. not. top, i thought i heard you say at the end of the year we marks that there was an inference that congress might have, is it appropriate it was fannie and freddie, might have in mind some of the years of market failure. ..
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nobody really knows what a free market system would be anymore. i think congress will have a great reluctance to go there because congress will be told that the realtors, home builders and others that it is too dangerous, that this will run the housing market and they will all be planned for. so it's not impossible to think we will go back to a freer market system, the congress is going to be very weary because that is going into the unknown this point. >> other questions? yes, over here. good evening and thank you for
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the opportunity. it was an excellent presentation this evening. my name is charles i'm a grad student at johns hopkins university. i've a question for you but they did to dan matt's testimony where he talks about a serious debate that occurred around 2005 whereby he mentions whether to stay the course and remain as a niche player in the mortgage market were to enter the sub prime market as a means to capture additional market share and stay competitive with what was occurring at that time. my question is, if sammy and that would've stay the course and not gonzo heavy into the subprime are up a market, what would happen and where would they be today? i know it is a hindsight is 2020 question command but interested where they would be today given that. >> thank you. that's an excellent question.
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i think they would've lasted certainly longer than they did. it's hard to know whether state has gave the course at that point that could have survived 2007, 2008. they might have. we did have a 30% fall in housing prices, which is pretty devastating for anyone holding chilies of dollars of mortgages. on the other hand their decision to not stay the course and take more risk starting at the beginning of 06 worsened the situation for the whole country and for themselves. dan would argue no matter what we did we couldn't have survived 2008. i think we will never really know that. but we do know what they did made things worse. >> as i indicated, my view is this is building over a very long period of time and it
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started as you look at nominal house prices increases nationally in 1994. brewhouse stated in 98 and in both cases reached levels that had never been even approached in this country's history. so you had going on a very long period of time it whom bobo with the boom part my last three, four years, five years tops. usually my experiences in every case i've been involved in from the 1970s onward, you end up with the last couple of years leading to some sort of crazy lending. that's the way lenders were. what a technical term calls going down the slippery slope and that's what would happen. so what she had here is a process that went on, for the real cost price change from 1998
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come the full year through 2006, 2007, you had nine or 10 years of unprecedented growth. the last couple years was really a frost. but she had an immense amount, a bubble of immense size before that. they were fundamentally undercapitalized and at the same time their capital is weak capital. they counted a lot of tax credit and tax losses and things. i think they were doomed no matter what because they were basically floating on a thin layer of capital. they negotiated that case in 1992. >> there was one more other big lender, really big lender to american real estate and that was the chinese and other foreign official bodies who were buying cnn friday obligations, which money was going to feed
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the bobo. but they were buying up rightly assume that the government would take care of them, even though they have virtually participated in running a risk. the risk would fall and somebody else and hundred paulson mr. interesting memoir with a telly went to china for the olympics and told the chinese finance minister something might come you see i told you i take your review. any other questions? one in the back here and then will come to you in the front. >> hi, david carrier, national association of credit unions. i'm curious who you feel should be securitizing mortgages and if you feel it is the banks, why should we trust them after what just happened? i'd like to hear from each of you on that one, thinks. >> were you trying to direct that to somebody in particular? >> to all three.
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>> up, we would be the first crack in and keep her other comments brief however. >> i would say it doesn't matter so much to does the securitization. i would be in favor of trying a rule or loans going into securitization have to meet certain commonsense standards. other wants that don't meet those standards could be made, but they would have to be kept by the lender. the securitizing could be a public utility or it could be opened up to any firm that wanted to go into that business. i think there's going to be huge debate about my structure makes an think it can be very difficult for congress to decide what is the right formula. >> i think i concur with bob on that. anyone that wants to securitizing issue should be permitted to do so, in terms of the government, but where any
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originator can issue securities. i think that the direction that dimarco is going with creating a securitization platform if you will that anyone can plug into is a good thing and will move us in the right direction, opennet securitization to any large originator that wants to put the polls together i would not preclude credit union national for an aba for like bodies to create for smaller entities that don't have large amounts of volume. >> or even a federal homeland name. >> in the white paper that alex and peter ralston and i wrote a year and half ago, we trust this question twofold. one was we should have a mortgage market that does not rely on government primarily in the way you get there is by
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having expert tatian and i designed the vast majority of loans are prime loans and commonsense panels, not the way they came to be defined. secondly, we suggested mortgage-backed security should be limited to prime loans. if you want to do something else can you do that through portfolio, with a capital requirements and others are different. i also point out there is a great study on my scholar page of the new york governor appointed a commission to investigate the collapse of mortgage-backed securities market and there is a commission appointed in this report and he detailed the problems of mortgage-backed securities. the date of the report is 1934. again, you can find it by web page. thank you. >> thank you. a question up here. microphone on the site here.
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>> i was just going to add a comment. >> i was with the other gse from 1990 to 1995. i became director of regulatory compliance and i have to say, this stress test predict te deum enabling of consummate this. they didn't allow for pre-falls into lazy assumptions were created. i worked with had on how they were going to be implemented. there was concern because people were thinking, why are we going to find all these people qualified for these mortgages? they were underwriting efforts to make the guidelines more friendly towards nationalities that may have a different way of dealing with home buying, where you have extended family type of support, gifts and things like that. but there was concern because it is a public and private company with market share in countrywide
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was coming on the securitization, but at that point, my perception was that fraud was you had criminal. it wasn't until housing became seen as an investment good that everyone got on the bandwagon and mortgage bankers came in. so that was my perception. we did the exotic products at that time were tiered payment mortgages. i mean, home-equity loans were just coming on board. most of the exotic things were really a certain type of arms and the low doc loans were monitored, but i think you have a different type of artwork. >> i'm going to have to cut your time or were going to run out. thank you for that comment. we will take two more questions and then the last question i'll
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come over here. >> on june 3rd rail, well known to tom and had. housing specialist at gao. so i'm going to estimate usual provocative questions. that's overtrained to do, right? be skeptics? this is to mr. haggerty, too, but i've not seen anyone >> you can fix that immediately after the program. >> i have a long history after myself dating way back before i ever came to gao. my question is basically this. i don't know whether you've done this in your book. i haven't seen anything along the lines for the financial inquiry commission didn't seem to be doing that and about to suggest which is something gao would do. if we ask whether or not the federal government was primarily or exclusively responsible, the first thing i know why that's it
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just to macculloch says okay, let's do a side-by-side comparison. but the air, private label, portfolio lenders. you know what their performances by cohort year, origination year. go backward everyone come in 98, 99 when the bubble began and cool the way up to 2006 and even beyond 2007 if you want, 2008. do a side-by-side comparison. the comparison has got to include not just loan default -- to fall percentages. i've seen that in an article i sent to you and others. that is not adequate. you have to translate that into low-volume based on unpaid principal balance. that is the key because it doesn't matter with a 7% default rate and private sector had 25% if in fact danny's volume is six times higher or vice versa. so i've never seen that done. i don't know if eugenic. i looked through it all over.
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until someone actually does that side-by-side thing, looking at the years before the bubble burst in a six and right after that, i don't see how you can make the conclusion that the private sector do it for the federal government did. >> any comments? >> it would be valid to look at it in that way. i can't remember if i have seen that volume related comparison. i think could be valuable to look at. >> jim, the issue that really changes the question is standing in friday on the prime market. if the affordable housing goals on subprime market, traditional prime market. nobody could compete for that.
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that became the basis of their core business. they had to move out in risk, they didn't build two more tiger prime. i've had pointed out in 2000, whatever fannie and freddie bob fisk deeded to be prime, the market due to his prime. you saw the charts and that's why put this out. as he moved out, we'll put up in a subprime loan. 33% would've been a subprime one. those are all called prime loans. where's the rest of the market going to go. your 20% in 1992. half of it with fha. half of that was the private sector. your 20% in 2002. they had a choice. they could either be in the field or they could move up to risk her tiered as fannie and freddie looked up, they had a choice.